Abstract
In January 1997, the U.S. Treasury began to issue inflation-protected securities (TIPS). TIPS protect investors from inflation by linking the principal and coupon payments to the Consumer Price Index (CPI). Empirical studies of TIPS have focused on their term structure, their role in diversifying portfolios, and their usefulness in generating a measurement of expected inflation. This chapter discusses TIPS unique characteristics, the role they play in aggregating inflation information and price discovery in Treasury security markets.
An econometric method is proposed to identify the speed and timing of TIPS price adjustments to inflation information. The econometric method is based on a pooled time-series cross-sectional regression analysis of TIPS daily holding period returns on inflation surprises. The inflation surprise is measured by the difference between actual inflation and the observed nominal and real interest rate spread. The speed and timing of TIPS price adjustments are revealed in the estimated cumulative regression coefficients. In addition, vector error correction model and common-factor model are applied to investigation price discovery in Treasury bond and TIPS markets.
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Notes
- 1.
According to the date of introduction of inflation-protected securities, these countries are: Finland, France, Sweden, Israel, Iceland, Brazil, Chile, Colombia, Argentina, the U.K., Australia, Mexico, Canada, New Zealand, and the U.S.
- 2.
The U.S. Treasury website (http://www.publicdebtreas.gov) posts the reference CPI for the following month after the CPI announcement date which is around the 15th of each month.
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Chu, Q.C., Pittman, D.N. (2022). Treasury Inflation-Protected Securities. In: Lee, CF., Lee, A.C. (eds) Encyclopedia of Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-91231-4_8
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